Perry flat tax vs. Cain 9-9-9: How they’d hit you

SAN FRANCISCO (MarketWatch) — When it comes time to pay your tax bill, whose tax plan will cost you less, Herman Cain’s or Rick Perry’s?

For most taxpayers, the answer is likely the plan offered up by Texas Governor Rick Perry on Tuesday.

Perry and Cain, both contenders in the race to be the next Republican candidate for president, are proposing massive overhauls of the current progressive income-tax system to one based on a flat tax, though Perry’s proposal allows an out for taxpayers who want to stick with the current system.

Based on the broad outlines offered Tuesday, Perry’s plan “is likely to be a tax cut for nearly everybody,” said Howard Gleckman, a resident fellow at the nonpartisan Tax Policy Center in Washington.

Certainly, under Perry’s plan, like Cain’s, high-income people would enjoy steep tax cuts. Perry eradicates the estate tax and taxes on dividends and capital gains, and reduces the tax rate to 20% from a current top rate of 35%.

As for middle-income people, under Perry’s proposal they could continue to claim deductions for mortgage interest, charitable contributions and state and local income taxes — he allows those deductions for people with income of $500,000 or less.

Plus, Perry hikes the standard exemption to $12,500 for individuals and dependents. Under current law, the personal and dependent exemption is $3,700 in 2011. He also proposes eliminating taxes on Social Security benefits.

Still, the degree to which your bill drops under a flat-tax plan depends on your situation.

“If you put in a flat tax, in general that would mean people who had been paying at 35% would pay at a 20% rate but the devil is in the details,” said Mark Luscombe, principal federal tax analyst for CCH, a Wolters Kluwer business.

“Most of these plans would also eliminate a lot of deductions and credits that currently you can use to reduce your income level under the current code, so you might be paying a 20% tax on a higher income than the income that would have been subject to a 35% rate.”

Choose your plan

Certainly, no one’s taxes will go up under Perry’s plan, because he’s allowing people to choose between their current tax rate and his 20% flat tax.

“Nobody’s going to pay more and many people will end up paying less,” Gleckman said. It’s unclear whether the option to choose between the two tax systems would be available each year, just once, or for some specific time period.

Lower-income people may prefer the current system. Under Perry’s proposed higher exemption, a family of three earning less than $37,500 (that is, $12,500 x 3) would owe no tax under the Perry plan. But under current law, that family might be enjoying significant tax breaks, such as the earned income tax credit and child tax credit, that result in refunds.

Those tax breaks aren’t available under Perry’s plan, but it appears he would allow that family to choose between filing under his 20%-rate plan or the current tax system.

The question is: with taxpayers either enjoying a tax cut or maintaining their tax status quo, what does it mean for government revenues?

“This is going to turn into a very, very large tax cut across the board and it’s going to reduce federal revenues dramatically,” Gleckman said. “As a result, it’s going to make this effort to balance the budget that much more difficult and implies very, very large spending cuts.”

More will pay more under 9-9-9 plan

Herman Cain’s 9-9-9 tax proposal calls for a 9% tax each on individual wages and businesses, and a 9% national sales tax. Cain eradicates the estate tax and capital-gains taxes, and all deductions except one for charitable contributions. He carves out some tax relief for low-income people, including “additional deductions for those living and/or working” in empowerment zones. Read more on Cain's website.

Reuters

Herman Cain, radio-talk-show host and former CEO of Godfather's Pizza.

The Tax Policy Center estimated that about 84% of taxpayers would face a tax increase under Cain’s plan, while the highest earners would enjoy significantly lower tax bills.

Still, the Center’s estimates do not take into account Cain’s decision, stated at a campaign stop in the week after he initially unveiled his plan, to offer more tax breaks for low-income people, including that people with incomes at or below the poverty line would not owe the individual tax cited in his plan.

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